Question

International Financial Institutions and Markets 1 Assignment 2 (of 6) Due: March 27th

The following items are a simplified version of recent balance sheet data relating to the Reserve Bank of Australia:

Government securities $50bn

Government balance $45bn

Exchange settlement account balances $30bn

Net foreign currency reserves (and gold) $70bn

Other assets $2bn

Currency at issue $60bn

Accounts due to foreign central banks and others $10bn

Loans to private banks $40bn 1.

Classify each of the above individually as either an asset or a liability of the Reserve Bank of Australia.

2. Draw up a balance sheet for the Reserve Bank of Australia, using the above data, recording Assets on the left, and Liabilities and Equity Capital on the right. Assume all the assets and liabilities of the RBA have been included in the above list.

3. Calculate the equity capital of the Reserve Bank of Australia. (1 mark)

4. Suppose the Reserve Bank of Australia makes a loan of $2bn to the National Australia Bank, which is a private bank. How does this affect the balance sheet of the Reserve Bank of Australia? Which item or items change, and by how much?

5. Suppose the Reserve bank of Australia pays a dividend of $5bn to the Australian Commonwealth Government. How does this affect the balance sheet of the Reserve Bank of Australia? Which item or items change, and by how much?

6. Can the Reserve Bank of Australia go bankrupt? If so, how could this happen? If not, why not

Answer 1

1 and 2 done simultaneously for saving time:

Liabilities	Amt.($)	Assets	Amt.($)
Government securities	50B	Government balance	45B
Accounts due to foreign central bank and others	10B	Exchange settlement account balances	30B
Net foreign currency reserves	70B	Other assets	2B
Currency at issue	60B	Loan to private banks	40B
		(Bal fig.)(Some items are missing)	78B
	190B		190B

3. The only equity capital is Government securities $50bn

4. Loan to private banks will increase by $2bn and government balance will decrease by $2bn

5. Government balance will decrease by $5bn and retained earnings will decrease by $5bn

6. Information missing for this question.